Macedonian journalists have been divided into two cohorts: the pro-government sources are labelled as ‘patriotic’ and those critical of it as ‘traitors’. ‘Patriotic’ media has made a practice of publishing lists of critics whom they identify as spies, conspirators and homosexuals. Journalists themselves report of declining working conditions in recent years, not to mention what could be termed as an open persecution of the free press.

The short-lived conflict between ethnic Albanians and the Slavic Macedonian government in 2001 was largely overshadowed by the earlier, longer, and far more costly conflicts in the neighbourhood in Croatia, Bosnia, and Kosovo. Inter-ethnic flare-ups have not been entirely exceptional in Macedonia since 2001, but the gun battle that broke out between Albanian militants and police in Kumanovo on May 10 was comparably seismic. The shootout claimed the lives of eight policemen and fourteen militants, many of whom hailed from neighbouring Kosovo, while thirty more were arrested. Coming on the wings of a government wiretapping scandal which has revealed widespread impropriety, accusations have been levelled that the recent inter-ethnic clashes were orchestrated by the government to divert public attention from the wiretapping revelations. Prime Minister Nikola Gruevski is at the epicentre of the scandal. If the wiretapping revelations and the government riposte (that they are part of a foreign conspiracy) carry all the familiar connotations of authoritarianism in the region, the possibility of exacerbating ethnic cleavage to crystallise government’s control is likewise reminiscent of the Slobodan Milošević regime’s machinations that sent Yugoslavia spiralling into ethnic war.

Unlike the case of its fellow Yugoslav successors, Macedonia did not plunge into a bloody inter-ethnic conflict with the collapse of Yugoslavia that began in 1990. Rather, the Socialist Republic of Macedonia transitioned to a parliamentary democracy relatively smoothly and peacefully, and in 1991 it declared its independence from Yugoslavia. For the next decade the rest of former Yugoslavia declined into brutal war, saw the rise of ethnic strongmen and experienced virtual economic collapse, the effects of which are still being felt. In contrast, Macedonia, a valuable regional ally of the US and NATO, made substantial gains in democratisation and began its path towards European Union accession in 1995.

Managing to stay comparably pacific throughout the tumultuous 1990s in the region, Macedonia did descend into a brief ethnic conflict in 2001 between the government (dominated by Slavic Macedonians) and the ethnic Albanians (that constitute roughly one-quarter of the country’s population). During the Kosovo War in 1998-99, Kosovo Albanians, having been driven out by the Serbian ethnic cleansing campaign, sought refuge with their ethnic kin in Macedonia’s Albanian-dominated Tetovo Valley. In 2001, radicalised elements of the Kosovo Liberation Army (KLA) founded the National Liberation Army (NLA), borrowed its insignia, and began attacking police installations in Macedonia. Demanding equal rights rather than secession or unification with the Republic of Albania, the NLA seized a number of towns and moved within artillery range of the capital, Skopje. Fearing escalation NATO and the EU quickly intervened militarily and brokered the Ohrid Framework Agreement, which sought to decentralise administration and police, and grant cultural and linguistic autonomy to the Albanian population. The disarmed NLA was transformed into the Democratic Union for Integration (DUI), which has become the largest Albanian political party and a ruling coalition partner since 2008.

A peaceful transition from communism to democracy and the quelling of inter-ethnic war in its early stages inspired optimism about Macedonia, especially compared to its neighbours. However such optimism has eroded since Macedonia’s attainment of EU candidate status in 2005. Since 2006, Nikola Gruevski, a former finance minister, served as the prime minister. Gruevski and his party, the nationalist VMRO-DPMNE (or just VMRO), have consistently acted illiberally to further entrench their positions of power, while inter-ethnic relations appear to have declined, returning some of the shadows of Macedonia’s dark past. The lustration laws, passed in 2008 and 2012, have allowed a government-appointed commission to review Yugoslav secret police files and blacklist those believed to be ‘collaborators’. Prominent intellectuals and former state officials have been lustrated, being publicly denounced and removed from public employment. Critics have vehemently argued that lustration has served as a means of silencing government critics and eliminating viable opposition, particularly because its 2012 reform was supported only by VMRO MPs.

Against this backdrop, press freedom in Macedonia has declined since 2009 to the worst in Europe in rankings by Journalists Without Borders. State-funded media and pro-government outlets have grown substantially, as the Broadcasting Council of Macedonia has closed independent and critical sources. Macedonian journalists have been divided into two cohorts: the pro-government sources are labelled as ‘patriotic’ and those critical of it as ‘traitors’. ‘Patriotic’ media has made a practice of publishing lists of critics whom they identify as spies, conspirators and homosexuals. Journalists themselves report of declining working conditions in recent years, not to mention what could be termed as an open persecution of the free press. Most notable has been the jailing of investigative journalist Tomislav Kezarovski in 2013 for publishing details of a leaked five-year old police report that allegedly influenced a trial. In 2011 Prime Minister Gruevski himself publicly denounced critical journalist Borjan Jovanovski. Consequently, the high profile physical assaults on Zoran Vasilevski and, more recently, Saše Ivanovski were carried out in a government-fostered environment, though not necessarily executed by government agents. It’s unfortunate that such illiberal behaviour targeted at the free press has become permissible.

With the longstanding Gruevski government having become the object of criticism from regular accusations of corruption and nepotism, further revelations of government wrongdoing by the opposition Social Democratic Party (SDSM) leader Zoran Zaev in February were unsurprising. What have come to astonish the south-eastern corner of the former Yugoslavia, or at least the foreign observers, are the scale of the illiberal meddling which has come to light and the lack of a valid rejoinder by the prime minister or his party. On January 31, Zaev was publicly accused by Gruevski of espionage and attempting a coup d’etat. His passport was confiscated and three of his associates, including a former security chief Zoran Verusevski, were arrested. This came after a meeting with Gruevski in which Zaev threatened to drop a ‘political bomb’ that would ruin the VMRO. Subsequently, the government banned the publication of any alleged ‘coup d’etat’ material. Gruevski stated that Zaev’s ‘political bomb’ was illegally obtained from unidentified foreign intelligence services seeking to destabilise the country, a common label for critics. Then, amid public demand and Western words of warning over democratic standards, on February 9 Zaev dropped his bomb, revealing government wiretapping on more than 20,000 Macedonians including VMRO, coalition partners and opposition officials.

The massive domestic wiretapping operation is illegal and in itself reveals the paranoia of the VMRO government and its desire to keep a tight control over its opposition and the general population. What Zaev has publicised in dozens of press conferences since February are recorded conversations that reveal the shadowy dealings of a tight inner circle of officials acting in their own interests to seriously sway elections, maintain control over the media, promote systematic nepotism and influence judicial proceedings. Among others, this influential coterie includes Prime Minister Gruevski, Interior Minister Gordana Jankuloska, secret police (UBK) chief Sašo Mijalkov, the Prime Minister’s Chief of Staff Martin Protugjer, Transport Minister Mile Janakieski and Vice Prime Minister Vladimir Pesevski, as well as pro-government media figures Emil Stojmenov, Dragan Pavlović and Goran Ivanov. At each press conference, by offering fresh transcripts exposing improprieties by these parties, Zaev called for the resignation of Gruevski. And each time Gruevski rebutted with accusations of libel and Zaev’s connivance with foreign intelligence services to destabilise Macedonia.

A number of wiretapped telephone conversations and SMS messages presented at Zaev’s press conferences expose a broad array of tactics employed by the VMRO to influence election outcomes. Notably, this included an elaborate scheme, employed in the 2013 local elections, of transporting ethnic Macedonians from the Prespa region of Albania by buses to vote in contested municipalities. According to the transcripts of the tapped conversations between Jankuloska, Janakieski, Protugjer and Gruevski the ‘Prespans’ were provided with IDs and addresses of residences owned by the VMRO. As many as 40 foreign voters were assigned a single address. The more routine designs discussed included using handpicked policemen to cause incidents – misplacing ballots, coercing public employees into voting favourably, bribing public officials and even shutting off sections of the power grid. Power was shut off in apartment blocks to keep the elevators off and prevent elderly citizens from voting. Graphic discussion on how to punish or slander uncooperative public officials by exposing them in pro-government media is also included in the transcripts.

Given Macedonia’s disquieting degeneration of media freedom under Nikola Gruevski, it was hardly surprising that further wiretapped conversations reveal seamless manipulation of pro-government media by the VMRO elite to sustain their image while libelling opposition and critics. One conversation, between Jankuloska and Gruevski, discusses a list of party-approved journalists eligible to be hired. In another conversation – mainly between Protugjer, Mijalkov and the editors-in-chief Stojmenov and Pavlovićdisplay – the government officials instructed the media figures on what news to run, how to present it and how long to run it. In one such conversation between Mijalkov and Pavlović, the UBK chief informs Sitel TV editor-in-chief about where and when a high-profile arrest will take place and how to film it. The dubious relationship between VMRO officials and the supposedly independent media is not a one-way traffic. In a number of recordings, high-ranking personnel from pro-government media discussed business interests and tax issues with their government contacts. Notably, Protugjer pledges, in a conversation, to keep the revenue department from investigating Kanal 5 TV for tax evasion.

Party interference in the independence of the press is highly detrimental to liberal democracy in Macedonia, and is undoubtedly the catalyst for the country’s dive down the globally accepted rankings. What further recorded conversations reveal is a similar corruption of rule of law by the elites of the VMRO. A series of revealed dialogues exposes a party list of acceptable judges and prosecutors who can be nominated. The Albanian DUI, a ruling coalition partner, is allowed to select a certain number of judicial sector personnel, but for the most part selection is left entirely up to the VMRO. Naturally, figures unsupportive of the party don’t qualify for the list of potential candidates. Additional conversations, featuring the voices of Jankuloska, Mijalkov, Finance Minister Zoran Stavreski and others, indicate widespread influence in ongoing trials and a judicial culture of clientelism. Calls to VMRO elites from pro-government media or influential supporters requested favourable judgements in cases against them and expressed gratitude to the VMRO for acquittals. And in one of his latest press conferences, Zaev has insinuated judicial impropriety in last year’s controversial terrorism conviction of six ethnic Albanians, in the so-called ‘Monster’ case.

Last summer when the ‘Monster’ case concluded in the terrorism conviction of six Muslim Albanians, who murdered five Orthodox Macedonians on Orthodox Easter near Smilkovci Lake in 2012, serious ethnic unrest broke out. The massive ethnic Albanian demonstrations in Skopje, protesting judicial improprieties in the case, turned violent. Albanians in neighbouring Kosovo joined forces in the protest, burning flags as they marched to the Macedonian embassy in Prishtina. While Zaev has refused to release the details of this alleged impropriety for fear of sparking inter-ethnic clashes, this claim is the last of the three that reasserts the government’s misconducts in some of the most recent controversies in the country. The first was the murder of the 21-year old activist Martin Neskovski who was beaten to death by the special police officer Igor Spasov following the 2011 election. Though recorded conversations do not implicate Gruevski’s inner circle in sanctioning the murder, they do indicate that Spasov wasn’t acting autonomously and that the government promptly began a cover up. The second dealt with the alleged accidental death of investigative journalist Nikola Mladenov in 2013 when his car went off the road just outside of Skopje. Zaev’s public account on May 7 highlighted a number of inconsistencies in the police reporting, hinting at a possible murder cover up, and produced wiretapped conversations in which VMRO figures mocked the journalist’s death and planned to use it to threaten Mladenov’s colleagues and others.

The erosion of credibility and the exposure of mass government impropriety over the past year have coincided with a seeming decline in ethnic relations in Macedonia, adding an additional and delicate layer to the current crisis. The violent rioting following the conclusion of the ‘Monster’ case was episodic, but it stimulated widespread cries of the Ohrid Framework Agreement being ignored. In its attempt to mitigate the civil unrest, the police exacerbated the situation by detaining at the border ethnic Albanians attempting to enter from Kosovo. Then in September, former Albanian politician Nevzat Halili declared an autonomous Albanian Republic of Ilirida within Macedonia. Unofficial Albanian paramilitary police reportedly began operating in Albanian dominated territory at this time. This was followed by reported grenade attacks on government buildings in Skopje and on police stations in Tetovo and Kumanovo, for which the ‘Liberation Army’ allegedly claimed responsibility or had responsibility conferred upon it. None of these projectile attacks resulted in casualties though. The two major events in April and May, however, constitute a prodigious escalation. On April 21, a group of around 40 men, armed and wearing the markings of the defunct NLA, entered from Kosovo and seized a police station in Lipkovo, threatening to execute the officers present. In the end the officers were released, but the militants escaped with stolen arms and ammunition. Three weeks later, the special police executed a large-scale raid employing armoured vehicles and long-barrelled weapons – resulting in a deadly, day-long shootout – in ethnically heterogeneous Kumanovo, believing to have tracked down the militant group responsible for the Lipkovo attack.

The violence of the Kumanovo raid, highly reminiscent of the 2001 conflict, took the country by surprise when compared to small-scale flare-ups over the past year. Albanian and Slavic Macedonian residents of Kumanovo denied knowledge of the group or inter-ethnic tension in the city and pledged their solidarity. Immediately following the violence in Lipkovo and Kumanovo, allegations of government orchestration emerged. Amidst the heavy criticism from Zaev’s wiretapping revelations it was alleged that Gruevski and the VMRO elite, who fancy themselves to be nationalists, orchestrated the attacks in order to divert attention from their own impropriety and to consolidate the waning support from among the nationalists. It was suggested by regional experts that government agents had hired the militants, many of whom were from economically desperate Kosovo, to antagonise the sensitive ethnic cleavage that has been fragile since 2001. If such accusations are valid, the successful antagonising of the Albanian population that has already supplied high numbers of fighters to the Islamic State in the Middle East could prove to be catastrophic not only for Macedonia but also for the delicate ethnic rifts in Bosnia and Kosovo. In the light of this, ethnic Albanian leaders in Macedonia have commended their ethnic kin for exhibiting restraint and resistance to any possible provocation.

Undoubtedly, Zoran Zaev’s credibility has been called into question by his initial attempt to use wiretapping information to seemingly blackmail Nikola Gruevski to resign. However, the mass wiretapping exposure has revealed widespread impropriety and authoritarian motifs in a government under whose stewardship Macedonia has declined economically and democratically. What has become evident over the past weeks is the fact that the denouement of the political crisis in Macedonia is still unclear. Just days after the Kumanovo shootout, three prominent VMRO figures – Mijalkov, Jankuloska and Janakieski – whose voices appeared in the wiretapped conversations resigned. Nikola Gruevski, however, continues to cling to power, rallying VMRO supporters against the SDSM, and continuing to accuse Zaev of complicity in a foreign conspiracy and ‘anti-state behaviour’. Such riposte, along with accusations of participation in communist plotting or a conspiracy by the Hungarian philanthropist George Soros, has become increasingly routine under the VMRO and hardly taken as substantive. With ethnic tensions rising over the past year, machinations by Gruevski and the VMRO to solidify the nationalist base risk Macedonia’s chances of being prevented to descent into inter-ethnic conflict. A journalist from the Balkan Insight described the West as having treated Macedonia since 2001 with a hands-off policy as long as the people weren’t killing each other. If the attack in Lipkovo wasn’t warning enough, the deadly shootout in Kumanovo signals a return of inter-ethnic violence to the forgotten Balkan corner, whether it was a product of government orchestration, a genuine ethnic grievance, or simply an autonomous terrorist cell. In the wake of Kumanovo, Western attention has been drawn back to Macedonia. On June 2, the EU concluded an agreement in Skopje to hold snap elections next year. But in a country pulled apart by so many factors, and with religious extremism lingering in the background, stronger stewardship will be needed. A substantial international mission, akin to the EU’s rule of law mission in Kosovo (EULEX), but informed by its shortcomings, would be instrumental in steering the country away from further authoritarian entrenchment, preventing escalation of ethnic antagonism and renewing the EU’s commitment to the once key NATO ally.

Christopher M. Jackson earned a MA in European Union Studies from the
European Union Center at the University of Illinois in spring 2015.
Previously he earned a BA in history from Centre College in Kentucky.
His research focuses primarily on conflict management, post-conflict
normalisation, and international development.

Hints of Yugoslavia in the Forgotten Balkan Corner: Authoritarianism and Inter-Ethnic Antagonism in Macedonia

Wednesday, July 22, 2015

This blog was originally posted on the REEEC website on June 25, 2015.

By Stephanie Chung

Branislav Radeljic (Associate Professor of International Politics at the University of East London) gave the first Noontime Scholars Lecture of the summer on June 16. Entitled “European Community – Yugoslav Relations: Documents that Mattered (1980-1992),” his lecture explored the complicated interactions between the European Community (a precursor to the European Union) and the former Yugoslavia as reflected in the archives. Official relations between Yugoslavia and the European Community were established in 1978, making Yugoslavia the first Eastern European country to have an ambassador to the European Community. While Yugoslavia primarily viewed a relationship with the European Community in economic terms (as a key source of financial aid during difficult economic times), the European Community approached its relationship with Yugoslavia in political terms.

The focus of Prof. Radeljic’s lecture was on the content available in the European Union archive in Brussels, Belgium, which traced the relationship between the European Community and Yugoslavia during the two decades before the 1992-1995 war that resulted in the breakup of Yugoslavia. In the 1980s, especially after the death of Yugoslav leader Josip Broz Tito in 1980, discourse about the links between the European Community and Yugoslavia became more explicit. Political cooperation was necessary for a stable economic relationship. However, the European Community’s perception of Yugoslavia was confusing as it knew very little about the country. It increasingly viewed its relationship with Yugoslavia with skepticism. Yugoslavia’s serious troubles in the 1980s led some members of the European Parliament (the legislative assembly of the European Community) to claim that Yugoslavia was an “artificial” entity that would fail. Though the country kept requesting aid, it never managed to reform. As indicated in the archive documents in Brussels, Yugoslav official visits (and the documents describing those visits) became longer in an effort to convince European Community authorities to support Yugoslavia. When Yugoslavia sought additional economic aid, the European Community kept Yugoslavia as a partner mostly as a way to preserve the Yugoslav state. Even as a partner, Yugoslavia was in a weaker status, demonstrated by the high presence of guest workers in Western Europe and the difficulties for Yugoslavia and its successor states (such as Serbia) to export products to the European Union.

Politically, the European Community was unable to form a solution to the Yugoslav crisis. Although European Community officials acknowledged the problem of the 1981 Kosovo conflict (Kosovo’s first declaration of independence, in which the Yugoslav army quelled riots and demonstrations in the country’s poorest region), they did not pay enough attention to the conflict and only exacerbated their own communication problems. Aside from the debate whether the Kosovo Serbs or the Kosovo Albanians were the were the real victims of the conflict, the problem of Kosovo was largely ignored. Additionally, the European Community tried to ensure that if any Yugoslav republics declared independence, they would not seek territorial claims toward their neighbors (specifically, those neighbors that were part of the European Community). In response, Slovenia (an economically well-performing republic that did not like sending money to the central Yugoslav government to distribute to poorer republics) argued that it “deserved” to be recognized as an independent state or else a conflict would occur along the Community’s borders. Croatia, another well-performing republic, also argued that it “deserved” to be independent and belong to Europe.

Prof. Radeljic’s lecture importantly used archival records to examine the relationship between the European Community and Yugoslavia prior to the crisis and subsequent war that tore the country apart. Very few scholars have studied that relationship before the war, despite Yugoslavia’s significant amount of contact with and reception of aid from the West during the 1970s and 1980s. Those two decades were also when Yugoslavia experienced political and economic crises that would eventually result in its dissolution. Prof. Radeljic’s research effectively fills a hole in the existing scholarship about the former Yugoslavia and brings up issues that would be beneficial in analyses of current European Union policies toward Eastern Europe.

Stephanie Chung is a Ph.D. Candidate in Slavic Languages and Literatures at the University of Illinois at Urbana-Champaign. Her research interests are in Soviet literature and culture, Russian women’s writing, and Czech literature. She received her B.A. in Plan II Honors/Russian, East European, and Eurasian Studies in 2007; and her M.A. in Slavic Languages and Literatures in 2009 at the University of Texas at Austin. She plans to write a dissertation on Soviet women’s memoirs as literary and media texts.

European Community – Yugoslav Relations: Documents that Mattered (1980-1992)

Monday, July 20, 2015

As the conflict in Ukraine has worn on for the past 15 months, the Ukrainian economy has exhibited continuous decline to such a point that the next six months will determine the country’s economic survival.

As the conflict in Ukraine has worn on for the past 15 months, the Ukrainian economy has exhibited continuous decline to such a point that the next six months will determine the country’s economic survival. In March of 2014, after the flight from power of pro-Russian president Viktor Yanukovych following the Euromaidan protests, Crimea unilaterally seceded from Ukraine and was annexed by the Russian Federation. Intense secessionist violence in the eastern part of the country followed as pro-Russian separatists took up arms against the new Ukrainian government. United Nations figures indicate that more than 6,000 lives have been lost in the fighting, while more than 950,000 Ukrainians have been internally displaced and another 600,000 have fled the country. Respite from this violence has been nearly impossible, with the Minsk Protocol’s ceasefire of last September never being fully realised on the ground and completely eroded by January.

Russia has No Desire of War with Ukraine: Putin

Speaking in Sochi in February of this year, Russian President Vladimir Putin dispelled claims of Russian warmongering by declaring that Russia had no desire to make war with its neighbours. Russian actions however have conveyed a different message. The last report of slain Russian activist Boris Nemtsov asserts that more than 220 Russian troops have been killed fighting in Ukraine and the Russian government has supplied up to $1 billion worth of support to the pro-Russian separatists. The report, which was based primarily on Nemtsov’s interviews with the families of the Russian casualties, finds that Russians who officially ‘quit’ the Russian Army were paid salaries as high as $1,774 per month for serving in Ukraine, and their families compensated with roughly $60,000 to not speak about their deaths.

Nemtsov’s report—brought to light after his death—was revealing. But the report by no means constitutes a revelation of the Russian military involvement in the separatist fighting in eastern Ukraine. Russian, Eurasian, and Serbian paramilitary volunteers have long been reported as fighting alongside the pro-Russian separatists; and modern Russian military hardware has been employed in the fighting.

American and British reports reveal that Russian artillery has been used from within Russia to shell Ukrainian government troops and positions. And, in the separatist region of Donetsk, Vladimir Antyufeyev, former Russian OMON special police officer and former Russian-backed separatist leader in Transnistria, was appointed the ‘deputy prime minister’. Regardless of official statements on military involvement, Russia has militarily and politically supported pro-Russian separatists through the provision of informal paramilitaries, experienced leaders, and military hardware, not dissimilar from the Serbian machinations in crumbling Yugoslavia during the 1990s.

Intense conflict in eastern Ukraine has had nothing but devastating effect upon the Ukrainian economy. Already with a national debt of more than $35 billion, it was the economically informed decision to turn towards Russia rather than the European Union in November 2013 that sparked the protests leading to Viktor Yanukovych’s downfall. Since the separatist conflict broke out following Crimean secession, the Ukrainian economy has exhibited fifteen consecutive months of decline while the national debt has more than doubled.

With such a severely contracted economy and continued fighting, Ukraine holds few prospects for economic recovery beyond external assistance. However, informed by their recent experiences in Greece, friendly stakeholders such as the European Union and International Monetary Fund (IMF) have proven wary of helping Ukraine without strict domestic reform.

By the end of 2014 economists were reporting that Ukraine’s economy as a whole had contracted by 8.2 percent while the national GDP had fallen by 7.5 percent. External debt reached $72.9 billion and internal debt $29 billion by the end of the year. Such decline has only worsened during the first half of 2015.

In April inflation had risen as high as 60 percent and the national currency, the Hryvnia, had devalued by more than 75 percent, the most in over a decade. Consequently the financial sector has suffered. Since the fighting began 40 banks have declared bankruptcy including the fourth largest lender, Delta Bank. The State Export-Import Bank of Ukraine (Ukrexim bank) and the State Savings Bank of Ukraine (Oschad bank), both holders of large Eurobonds, are at risk of probable default and have had their international credit rating continuously downgraded.

While the dire state of Ukrainian national debt is largely to blame for the marked contraction of the economy, decline in industrial production shares some of the blame. In May of 2014 the Ukrainian government lost de facto control over the country’s industrial heartland in the east. Both Donetsk and Luhansk, historically dominant industrial centers, declared themselves independent, the Donetsk People’s Republic and Luhansk People’s Republic respectively, and have since been the focus of intense fighting. Consequently, in the two regions that constitute over 15 percent of Ukraine’s national GDP, industrial output has drastically fallen.

In Luhansk output has fallen more than 90 percent in the past twelve months, while Donetsk has exhibited a 49 percent drop. This has contributed to an overall 21 percent decline in industrial output nationwide, while also denying the government a substantial tax base. Furthermore, the lengthy and intense violence focused in these regions has cost the government significantly in terms of human and financial capital. Without a successful peace settlement in this industrially-dominant region of the country it is difficult to expect the Ukrainian economy to begin a recovery under its own power.

Given the consistently worsening state over the past fifteen months and the continuation of hostilities indicating continued economic contraction, the only real prospect for economic salvage is external. Following Viktor Yanukovych’s ousting in 2014, interim president Oleksandr Turchynov signed an agreement with the IMF, and his elected successor Petro Poroshenko signed an Association Agreement with the EU. The EU quickly contributed $2 billion towards the payment of Ukraine’s $3.5 billion debt to Russian energy giant Gazprom. And, in March of this year, the IMF approved a $17.5 billion loan to Ukraine, the first $5 billion trance of which was paid that month.

However, still dealing with the effects of Greek default, dispersal of the remainder of the loan carries strict austerity conditions. Public employment must be reduced and the government is required to desist from extending energy subsidies, meaning that the price of gas for citizens will increase as much as seven-fold in the next months, while wages are expected to decrease. However the most problematic condition for dispersal of the second trance of the loan is the restructuring of $15.3 billion in sovereign debt to foreign investors.

Restructuring of debt is especially difficult given that it can not realistically be done unilaterally by the Ukrainian government, but must also have the endorsement of the holders of that debt. The omnipresent matter of gas debt to Russia is perhaps the easiest to address. As of November, the IMF had joined the EU in pledging funds for that expressed purpose. Gas debt has long been an issue, even under the Yanukovych government. After his ousting, Ukraine lost its discount from Gazprom, who cited debt and failure to make current payments.

This sparked stark remonstrations from the new Ukrainian government under Turchynov and the threat of a lawsuit against Gazprom. Under pressure from the EU, the Russian energy conglomerate has since granted Ukraine some leniency, restoring the previously offered discount rate on a prepaid basis. However, Gazprom has continued to quote figures as high as $25 billion that Ukraine owes to it and Gazprom bank.

Restructuring of sovereign debt, or externally issued national bonds in foreign currency, will prove far more difficult than relieving debt to Gazprom. Around $19 billion in sovereign debt is held by two groups of Western investors. One group—based in London and comprised of BTG Pactual Europe, Franklin Advisers, TCW Investment Management Company, and T. Rowe Price Associates—holds roughly $8.9 billion of Ukraine’s sovereign debt. And another group of five investors in the United States holds an additional $10 billion. Both groups have been supportive of Ukraine’s economic recovery efforts and efforts to satisfy the IMF conditions, however have spoken out against the restructuring of the sovereign debt they hold.

Far less supportive and agreeable to Ukrainian efforts to meet IMF conditionality has been the Russian government, which holds $3 billion of Ukraine’s sovereign debt in the form of a Eurobond. Purchased in late 2013, prior to Viktor Yanukovych’s fall from power, this bond comes due in December of this year.

This Moscow-held bond possesses a clause by which payment can be triggered should the issuer’s national debt reach 60 percent of its national GDP, a threshold which Ukraine has reached. However, Russian officials have indicated they will not invoke this clause and continue to repeat that they expect on-time payment in December, rather than early. But then again, even making that payment will be difficult. While it has been suggested that the Ukrainian government classify this as ‘odious debt’–money borrowed and misappropriated by a past regime–this argument has rarely been upheld in court and was not claimed even by the post-Apartheid government in South Africa or the post-Saddam Hussein government in Iraq.

On May 19, the Ukrainian Parliament passed a bill allowing the government the right to declare a moratorium, or stay of payment, on foreign-held debt. This is to apply to privately held debt, and is thus applicable to that debt held by the investment firms in the US and the UK. The Ukrainian government has furthermore classified the Moscow-held $3 billion Eurobond as a private investment and is accordingly subjected to a government moratorium.

Such an act has antagonised both the western investors and Moscow. Both have derided the unilateral debt restructuring. The Russian government regards this move as the first step in a Ukrainian technical default, by which further international borrowing would be prohibited.

Separatist conflict in eastern Ukraine following the Russian annexation of Crimea has sent the Ukrainian economy plummeting from an already deprived state. Consequently the fate of the economy has been taken from Ukrainian hands and is now dependent upon the patronage of the European Union and IMF, whose infamous austerity conditions have only further been informed by recent experiences in Greece.

In order to receive the aid of these benefactors, Ukraine must successfully address the issue of its immense sovereign debt, held, besides foreign investors, by the Russian government, which has demonstrated its support for subversive pro-Russian separatists. The coming months will tell if Ukraine is able to appease its debt-holders and meet IMF austerity conditions to begin a recovery. Or else the economic contraction will continue to ensure a default, plunging the war-ravaged country into further crisis.

Christopher M. Jackson earned a MA in European Union Studies from the European Union Center at the University of Illinois in spring 2015. Previously he earned a BA in history from Centre College in Kentucky. His research focuses primarily on conflict management, post-conflict normalisation, and international development.

Thursday, July 9, 2015

EUC affiliated faculty Kostas Kourtikakis was interviewed by the University of Illinois News Bureau for its "A Minute With" series. Kourtikakis discussed the Greek economic crisis with News Bureau social sciences editor Craig Chamberlain. This article originally appeared on the News Bureau website.

Editor’s note: Greek voters were asked on Sunday (July 5) to vote on the
latest terms for another bailout, following a week in which the country missed
a crucial debt payment and closed its banks. They said “no,” causing speculation about a possible “Grexit,” or Greek exit from the eurozone (the 19 nations within
the 28-member European Union using the euro currency) - even as Greece and its creditors worked on a new accord. Political scientist Kostas Kourtikakis, a
native of Greece and lecturer at the University of Illinois, is an expert on
the EU and its institutions, as well as on the politics of Greece and the
region. He also spent two weeks in Greece leading up to the referendum.
Kourtikakis (pronounced kor-tee-KAH-kihs) spoke with News Bureau social
sciences editor Craig Chamberlain about Greece, the ongoing debt crisis and the
future of the EU.

First of all, what has been the mood in Greece about these developments?

There was an air of division and
animosity in the week leading up to the referendum. The climate reminded me of
a different era in Greek politics, which many Greeks of my generation had
considered to be a thing of the past.

Citizens were divided in two camps
that disagreed so much that even their understanding of what is at stake was
different. The members of the “no” camp, which included the current coalition
government, interpreted the referendum question literally. They were saying
“no” to the agreement proposed by Greece’s creditors on June 25, which the
government put on the ballot. Though some wanted a Greek exit from the
eurozone, I think that most did not. They only wanted a new agreement that
would involve less austerity and provide more stimulus for the economy.

On the other hand, the supporters of
the “yes” camp, which included most opposition parties, understood the question
more broadly, as a matter of whether or not Greece wanted to remain with the
euro. An underlying assumption was that Greece’s partners in the eurozone would
interpret the vote in the same way. Even though most people in the “yes” camp
also opposed austerity measures, they saw these measures as a necessary evil.
Despite any short-term costs associated with austerity, they saw eurozone
membership as yielding long-term benefits for the country, believing that
euro-related reforms make the economy more competitive and prosperous.

Some news reports point out that even if Greece was borrowing and spending irresponsibly before its debt troubles, it has implemented the required austerity measures in recent years, cutting back government spending and raising taxes. But it’s also now in a deep recession, with unemployment at 25 percent. What are its options for digging out of this economic hole?

There are two main views about how
Greece can get out of this mess, which are roughly represented in the positions
of the two camps. Until now, the view promoted by the EU and the International
Monetary Fund, based in market-oriented policies, is that Greece needs to cut
public spending even more to reduce its debt. At the same time, the EU and the
IMF are asking for structural reforms that will revitalize business, which can
make up for the economic activity lost as the government sector shrinks. These
reforms include making the labor market more flexible, opening protected
products and services to competition, and reducing government corruption and
red tape. Further reform of the tax system is also considered absolutely
necessary, so the government can reap the benefits of economic growth through
tax revenues.

Yet there are experts who loudly
criticize the EU/IMF approach, among them prominent American economists Joseph
Stiglitz and Paul Krugman. The current Greek coalition government also belongs
in this group. They typically support structural reforms, but think that asking
a government to cut spending further during a period of prolonged recession is
counterproductive. They reason that with a reduction in salaries, pensions and
infrastructure spending, incomes then drop, private spending shrinks and market
activity stalls. As a result, government revenues in the form of taxes fall
even further, and the government finds itself even less able to service its
debt. The solution of these experts is economic stimulus, which means actually
increasing some forms of government spending or at the very least not reducing
it at all.

The EU has been dealing with debt issues for more than five years, and earlier on every new crisis seemed to threaten the entire international financial system. Is that still the case? What’s the worst that can happen if Greece were to leave the eurozone or default on its debts?

For the last five years, the
European Union has taken measures to protect its financial sector against a
“Grexit,” thus also protecting the international financial system, with which
it is closely linked. For example, most of the Greek debt has been transferred
from private institutions, such as commercial banks, to government entities,
such as the European Central Bank and the IMF. In fact, other eurozone
governments now own the biggest chunk of Greek bonds. Moreover, the EU has set
up a permanent bailout fund to assist weak eurozone economies that may need
support.

But despite the adoption of all
these measures, it is impossible to know for sure how well the financial system
is really protected, until Greece actually ever exits the eurozone. Moreover,
even though private institutions are now more secure, if Greece leaves the
eurozone and goes bankrupt, all the governments that own Greek bonds will
effectively lose the taxpayer money they now have invested in Greek debt. This
uncertainty gives pause to leaders in eurozone countries, some of whom are
otherwise tempted to cut Greece loose, because domestic public opinion is
turning increasingly hostile toward future Greek bailouts.

More than a few commentators suggest that the euro itself is as much, if not more, to blame for these ongoing debt issues. Can the EU and the eurozone continue in their current form?

There is a fundamental logic behind
the EU’s economic union, which has been designed as a decentralized union in
which each participating government is expected to follow certain common
economic rules. I think the current logic is not going to change soon, not only
because it will require a revision of the EU treaties, on which member-states
are extremely unlikely to agree, but also because there is no political will to
take the EU in this direction right now.

Yet, surprising as it may sound,
until the Greek crisis, the EU did not have effective mechanisms to deal with
situations like this in which the common rules are not enforced. In responding
to this crisis, the EU has been making all sorts of adjustments. One is the
establishment of the permanent bailout fund. Another is a new eurozone
agreement, dubbed as the “fiscal compact,” that makes common economic rules
strictly enforceable under national law. However, I don’t anticipate a
significant change in the rules-based nature of the entire system, at least not
in the foreseeable future.

Editor’s note: To contact Kostas Kourtikakis, who is
traveling in Europe until July 22, email kkourtik@illinois.edu.

Greece in Crisis: A Minute With Political Scientist (and Greek Native) Kostas Kourtikakis

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